100 Words On: Why I Don’t Feel Guilty Getting a Yearly Tax Refund

From a purely financial perspective, there’s no doubt that it’s better to maximize income tax withholding exemptions on your W-4 form because the resulting additional take-home pay can be invested or placed in an interest-bearing savings account. After all, the alternative is to give the government an interest-free loan every year. Even so, I still prefer to get an annual tax refund — mainly because the guaranteed lump sum windfall makes planning easier.

The bottom line: Any potential monetary gain I’m forfeiting by over-withholding my income is essentially too small to worry about — so I don’t. Unless your refunds are enormous, neither should you.

Comments

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David Msays

I agree 100% – especially now with interest rates so low!

My wife runs her own company, I’m to lazy to submit quarterly tax forms for her company – thus I have extra taxes taken from my check. I figure as long as we are getting a refund the IRS is not going to worry that we are not making required quarterly tax payments.

Agreed – Especially in this political climate where recently the tax laws have been changing more than ever it seems as the tax year is still going on. Also, getting a small return of say $1000 has a larger psychological benefit than saving $83.33 a month. A mix of smart money management but a few bits of positive reinforcing mind tricks is never bad thing!

Great point, Bill. I know it does for me. In fact, upon further reflection, it’s probably an even better justification for why I prefer refunds too — although it does also help us with long-term planning for big-ticket purchases.

I have to agree. Interest rates are lousy and the poor economy makes scoring larger investment returns dicey. What’s a couple of percent over a few grand across a year? A hundred bucks (before its taxed the second time around for interest or capital gains)? Forget it.

I absolutely agree with you. Sure it’s an interest free loan to Uncle Sam, but what’s the alternative? Earning 0.5% in savings?

In our case, there are 3 of us (wife, me, son) and one job (mine), so I withhold as M4. But we still got back a substantial refund thanks to the higher education tax credits and deductions. (I’m a Santorum sob.)

So why don’t I have more withheld? It’s like Bill says above; the tax rules change on a whim every year, and credits can disappear. I’d rather not owe taxes unexpectedly due to a mid-year rule change.

It kind of makes me pine for the days when I was earning double-digit-percent interest rates on my savings as a kid (back in the late 70s/early 80s)! Oh, yes, folks. All savers were earning those rates. Dare I say it reached 18% at the peak? (I may be mistaken now, that was so long ago.)

And if those rates ever return — and I betcha dollars to donuts they will — you and I would be foolish to continue over-withholding!

Did I say 0.5% interest? I was optimistic. I looked up the current rate at my credit union for a savings account: 0.25%

When I was a kid, a savings account typically earned 4%. Then, as you say, things began to jump in the 1970’s. I recall my father having an 18% mortgage at one point. Things were cooling off by 1983 when we bought our first home — a typical mortgage was 12.5%.

We have a few savings bonds purchased prior to June 1995 that are still earning 4% to this day. Not a great return at the time, they sure look wonderful now. They were originally purchased as part of a college savings fund, but we’ve held on to those puppies and found the college money elsewhere!

I’m with ya, Griper. Unfortunately, the politicians have a vested interest in keeping the status quo. It’s up to the electorate to ensure it installs politicians into office who are brave enough to make the tough financial decisions required for the long-term viability of our nation.

I know you don’t blow your income tax refund, but too many consider it found money and blow it.
IMHO if you are making 20 grand, a thousand dollar refund is too much. Make the payroll tax adjustment, but if you feel better with a refund, keep the refund small relative to income.

Like you I don’t sweat over small numbers, but I think this is one situation that a blanket policy is too broad. As long as people are “thinking it through” rather than just accepting a huge refund, I’m cool. (not that anyone cares….)

Sometimes a large refund can not be controlled. A family of 5 earning $50,000 per year or less ( insert link to Len’s $40,000 per year earning post here) should expect most of the $1000.00 per child tax credit as well as some Earned income tax credit. These can only be claimed when the tax return is filed and may lead to a large refund. These people would be part of the 49% who do not pay federal income tax but, if they are younger than 40, they are part of the 100% who are getting hosed by FICA.

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